In a strategic move to capitalize on the burgeoning artificial intelligence (AI) market, Nokia has announced its acquisition of U.S.-based optical networking gear maker Infinera for $2.3 billion.

This deal positions Nokia to benefit from the significant investments pouring into data centers to support the rise of AI technologies.

Boosting Market Position

The acquisition of Infinera will elevate Nokia to the second-largest vendor in the optical networking market, capturing a 20% share, second only to Huawei.

This move allowed Nokia to surpass Ciena, enhancing its competitive edge in a market where Western companies have minimal presence in China.

Diversifying Beyond 5G

With sales of 5G equipment slowing, telecom gear makers like Nokia are seeking new growth avenues. The AI-driven data center market presents a lucrative opportunity. 

Nokia’s purchase of Infinera enables it to offer more advanced equipment to tech giants such as Amazon, Alphabet, and Microsoft, who invest heavily in building new data centers.

“This is pretty optimal timing for a deal of this nature when you are timing it just before the market is expected to start to recover,” Nokia CEO Pekka Lundmark told Reuters. “AI is driving significant investments in data centers, and one of the key attractions of this acquisition is that it significantly increases our exposure to data centers.”

Strengthening Data Center Communications

Infinera specializes in intra-data center communications, which involves server-to-server communication within data centers. This segment is expected to be one of the fastest-growing areas in the communications technology market. 

Integrating Infinera’s technology will strengthen Nokia’s portfolio and position it to meet the increasing demand for efficient data center infrastructure.

Positive Market Reaction

Following the announcement, Nokia shares rose by 4% in morning trading, indicating investor confidence in the deal. Typically, buyer shares might dip due to dilution in cash-and-stock deals, but Nokia’s move seems to have garnered positive sentiment from shareholders.

Nokia plans to fund 70% of the purchase price in cash and the remaining 30% in stock. The company anticipates saving 200 million euros ($213.88 million) in costs post-acquisition, which is expected to close next year. 

Analyst Mads Rosendal from Danske Bank Credit Research noted that while the purchase multiple may appear high due to Infinera’s fluctuating growth, achieving the projected synergies could justify the price.

Complementary Market Reach

Infinera derives about 60% of its business from the United States, while Nokia has a stronger presence in Europe and Asia. This complementary geographic reach will enhance the combined entity’s global footprint. 

“The two businesses together have combined cost of sales of over 2 billion euros and operating expenses of over a billion euros. Against that target, 200 million euros is not a particular stretch,” Lundmark said, although it was too early to comment on potential layoffs.

AI and Data Center Synergies

Nokia’s focus on AI and data centers aligns with broader industry trends. Integrating Infinera’s technologies will help Nokia cater to the rising demand for AI-driven data center solutions. 

As AI applications proliferate, data centers require robust optical transport networks to handle increased data traffic efficiently.

Financial and Strategic Implications

The deal is Nokia’s largest acquisition since its $11.4 billion takeover of Alcatel-Lucent in 2016. By strengthening its optical networking capabilities, Nokia aims to drive growth in its fixed network business. 

It anticipates a pickup in the second half of the year as customers increase orders for cloud infrastructure technology.

Despite challenges in the mobile network market, this acquisition positions Nokia for a strong recovery. Nokia and Infinera have faced weaker spending in recent quarters, but the expected recovery in the optical market by 2025 offers a promising outlook.

Nokia’s $2.3 billion acquisition of Infinera marks a strategic pivot towards the high-growth AI data center market. By leveraging Infinera’s expertise in intra-data center communications, Nokia aims to strengthen its market position and capitalize on the significant investments in AI-driven infrastructure. 

The deal’s timing, coupled with anticipated synergies and cost savings, positions Nokia for a competitive edge in the evolving communications technology landscape. 

As the integration process unfolds, the combined entity is poised to become a formidable player in the global optical networking market.

The information is taken from MSN and Yahoo News